Original article by John Basquill, GTR
Singapore’s financial regulator has called for a move away from paper-based trade transactions in a bid to reduce fraud, after a series of high-profile scandals in the city state’s commodities sector.
Senior minister Tharman Shanmugaratnam, who is also in charge of the Monetary Authority of Singapore (MAS), says “weak disclosure practices and internal controls” at a small number of trading houses is to blame for the slew of fraud cases that have emerged in recent months.
The high-profile collapse of Agritrade International in March led to claims of fraudulent financing that left banks hundreds of millions of dollars out of pocket.
The following month, Hin Leong – previously one of Asia’s largest independent trading houses – was placed under judicial management amid accusations of widespread double financing, document forgery and other fraud. Initial bank exposure is believed to have been as high as US$3.5bn.
Since then, similar accusations have emerged at other traders including Hontop, Sugih Energy and ZenRock, causing nervousness among banks. Société Générale and BNP Paribas have already revealed they are consolidating or limiting commodity finance activities, while ABN Amro plans to withdraw entirely.
Murali Pillai, an MP for Singapore’s ruling People’s Action Party, submitted a parliamentary question in early October asking what action was being taken to limit de-risking by banks and to “ensure that there will be a sufficient number of banks providing such facilities on reasonable terms”.
Pillai also suggested a need to restore Singapore’s reputation as a global trade finance hub.
“We do not take this lightly,” Shanmugaratnam said in response.
“To prevent such fraudulent activities and restore confidence, there needs to be a strengthening of standards and practices of transparency and governance in the commodities trading sector, more robust credit risk assessment, as well as a move away from paper-based processes as they are more susceptible to risk of fraud.”
Shanmugaratnam said the MAS is partnering with industry participants and government agencies “to digitalise trade financing, and replace the current paper-based systems with electronic documents and data flows”.
The minister also moved to ease concerns over bank de-risking, acknowledging trading companies “are facing more rigorous credit assessments and tighter financing conditions” at the moment, but vowing that creditworthy firms “will be able to access the bank financing that they need”.
One digitisation initiative is already taking shape. A group of 14 banks led by Standard Chartered and DBS Bank announced in early October that pilot testing had successfully been completed on a blockchain-based registry for trade finance transactions.
Though the project remains at proof-of-concept stage, the intention is that by digitising various data points and documents banks will be notified if a trader is attempting to seek duplicate financing for a single transaction. Though private sector-led, the registry is supported by the MAS as well as government agency Enterprise Singapore.
Shanmugaratnam also said banks would be permitted “to obtain data directly from Singapore Customs to perform risk assessment”, though details are not yet public on what that will involve, or whether there will be any equivalent measures for trade that does not originate or terminate in Singapore.
Responding to the concerns over disclosure practices within the commodity finance sector, the minister reiterated a July statement from MAS that a set of best practice principles is currently under development.
Now described as a “code of conduct”, he said the project should be finalised in the final quarter of this year. Its development is being overseen by the Association of Banks in Singapore, government agency Enterprise Singapore and the Accounting and Corporate Regulatory Authority.
“The banks are currently consulting the trading companies, who themselves have an interest in higher standards being practiced amongst all players in the industry,” he said.
Two sources familiar with the discussions say the emphasis so far has been on improving transparency around trade finance.
However, they say larger trading companies – traditionally reluctant to disclose details of their financial arrangements – have so far given the code of conduct project a lukewarm reception.
It is not yet known whether authorities will expect compliance with the code to be mandatory or voluntary, and the MAS did not confirm either way when contacted by GTR.
“This only works if there is enough buy-in from lenders, who will insist that they will not lend to borrowers who do not follow the code,” one source adds.